Effective transmission

The biggest takeaway from RBI’s monetary policy review was the central bank’s shift in its liquidity management stance

The biggest takeaway from the first monetary policy review of the fiscal year was the central bank’s shift in its liquidity management stance. The Reserve Bank of India will now aim to progressively eliminate the liquidity deficit from the banking system.

Since it has instruments such as variable rate reverse repo to reduce excess liquidity if required and maintain the operational rate, the need for a continued liquidity deficit has diminished.

The injection of durable liquidity in the banking system—and other measures such as narrower policy rate corridor and favourable adjustments in reserve requirement—will lead to better transmission of policy rates. A sustained liquidity deficit was seen as one of the impediments to the transmission of accommodative monetary policy.

Lower policy rates, a better liquidity situation and banks’ transition to marginal cost of funds-based lending should result in lower lending rates, which are likely to help economic activity.